The political responses to the Covid-19 pandemic present unprecedented and acute challenges for the EU Member States’ financial and economic systems. To cushion the economic consequences of the Covid-19 crisis, the EU intends to set up a recovery fund with the substantial sum of 750 billion euros. The recovery fund will provide money in the form of loans and non-repayable grants to Member States particularly affected by the pandemic. This financial support aims to set the Member States on the path to a sustainable and resilient recovery. Hence, the funds predominantly support green and digital transformation. According to current proposals, the fund needs to be debt financed. For this purpose, the Own Resources Decision entitles the Commission to issue bonds on behalf of the EU. In the course of this process, the EU is going to become a major player in the capital markets.
In my recent paper on European Legal Limits for the Recovery Fund, I argue that the recovery fund is not in line with EU constitutional law. According to the principle of conferral, which underpins the EU, the EU acts only within the limits of the competences conferred upon it by the Member States in the Treaties to attain the objectives set out therein (Article 5(2) TEU). Consequently, any action by the EU must be based on a sufficient authorisation to act granted within the EU Treaties. This also applies to the issuing of bonds on the financial markets by the Commission on behalf of the EU. The EU Treaties do not confer a general power to borrow on the EU. At times, the lack of a general power to borrow has not prevented the EU from issuing bonds on the financial markets. The EU has usually used the flexibility clause to overcome its lack of a fundamental borrowing competence. In other words, borrowing has in the past usually been based on secondary EU law, which is based on Article 352 TFEU, the flexibility clause. However, the flexibility clause cannot provide a sufficient legal ground for the issuing of bonds for the recovery fund. Unlike past examples, the funds are not limited to passing on the benefits of the EU’s credit rating to the Member States. The borrowed funds are intended to finance transfers via economic policy measures and, although they may be covered by EU policy areas, there can be no doubt that this massive redistribution has an impact on the overall structure of the EU. Such a momentous borrowing and use of funds via the recovery fund cannot be based on Article 352 TFEU.
As a result, the EU does not have sufficient competence to issue 750 billion euro bonds to finance the recovery fund. Although the Own Resources Decision is intended to grant the EU greater financial autonomy—in other words, to strengthen the EU’s financial autonomy vis-à-vis the Member States—this cannot go so far as to grant the EU further competences. The transfer of sovereign rights requires a Treaty amendment under Article 48(2) to (5) TEU. Even the flexibility clause cannot alter this finding, because the consequences of the borrowing for the recovery fund are too far-reaching to fall within Article 352 TFEU. Similarly, the attempt to base a secondary law authorisation to borrow on Article 122 TFEU must fail. The possibility of financial support in emergency situations does allow for a burden on the EU budget. However, this authorisation cannot be understood to go so far as to legitimise the procurement of funds using borrowing to provide assistance.
Aside from the conflicts with EU constitutional law, the recovery fund is also not in line with EU budgetary laws. The proceeds from borrowing for the recovery fund will not flow into the EU budget. The Commission proposal justifies the off-budget treatment in two ways, depending on whether the funds are used as non-repayable grants or as low-interest loans to Member States. If the borrowed funds are used for low-interest loans to Member States, the off-budget treatment is supposed to be allowed as the EU borrowing is neutral for the EU budget. The loan taken out by the EU is matched by a separate asset (the claim on the Member State). However, such a wide interpretation of budget neutrality contradicts the principle of universality, which demands that all revenue and expenditure are entered in full in the budget and in the accounts. If the proceeds from borrowing are used to finance non-repayable grants to Member States, off-budget treatment is supposed to be justified as the funds constitute external assigned revenue according to Article 21(5) of the Financial Regulation. Assigned revenue does not fall within the EU budget because a secondary EU law act establishes a link between revenue and expenditure. In the case of the recovery fund, the regulation for a recovery instrument establishes the link between the borrowed funds and the grants to Member States. The off-budget treatment of the revenue ensures that the financial resources are only used for the intended purpose. If the financial resources flowed into the general budget, the borrowed funds would be at the EU’s free disposal on the basis of the non-assignment rule. At the same time, however, the exclusion from the general budget should also protect the budget itself, since the expenditure for the financing of the specific tasks should not burden the budget.
As stated above, the recovery instrument is attempting to establish a link between borrowed funds (as revenue) and non-repayable grants to Member States (as expenditure). However, this attempt is insufficient. The loans are only intended to bridge the gap between the EU receiving own resources and the EU spending these financial resources, as these loans will have to be repaid by the EU at a later stage. Consequently, a link cannot be established with the loan funds, but instead only with the financial resources used to repay the loans. The plans for the recovery fund do not, however, specify any new own resources that will be used explicitly and exclusively to pay off the debt.
Accordingly, the borrowed funds used to finance the non-repayable grants must fall within the EU budget. However, Article 17(2) of the Financial Regulation prohibits debt financing of the budget. This conflict cannot be resolved without amending existing EU budgetary laws.
Caroline Heber (MTax (Sydney)) is a Senior Research Fellow at the Max Planck Institute for Tax Law and Public Finance.